(Bloomberg) — Bank of France Governor Francois Villeroy de Galhau joined regulators in calling for reforms of the credit default swaps market after it briefly plunged Deutsche Bank AG into turmoil last month.
(Bloomberg) — Bank of France Governor Francois Villeroy de Galhau joined regulators in calling for reforms of the credit default swaps market after it briefly plunged Deutsche Bank AG into turmoil last month.
“The lack of liquidity of this market and its opaqueness caused an undue episode of financial distress affecting Deutsche Bank,” Villeroy said, according to prepared remarks for a speech at a Eurofi conference in Stockholm on Friday. “We should not accept that such a dysfunctional market entails such systemic risks.”
Investors use credit default swaps to hedge risk or make bets on how companies will fare, but the instruments are sometimes thinly-traded and small positions can spook the wider market. After the recent Deutsche Bank turmoil, regulators focused on a single trade in an illiquid part of its credit default swaps that they suspect sparked concern, Bloomberg reported last month
Deutsche Bank Chief Financial Officer James von Moltke said Thursday that his firm was the victim of a “speculative attack” that prompted the stock to drop as much as 15% on March 24. He didn’t elaborate to observe on whether the effort was intentional or who was behind it.
“It probably does bear some scrutiny as to how that market works and whether there are ways to improve it,” von Moltke told analysts on a conference call to discuss Deutsche Bank’s first quarter earnings. “We were tested and we showed ourselves to be a strong stable bank without the vulnerabilities that the market was concerned about.”
Villeroy said that as a first step, authorities “need to establish a better understanding of the transactions, the participants and the risk of correlation with other financial instruments” such as additional Tier 1 notes and deposits.
He joins Andrea Enria, the European Central Bank’s top oversight official, in highlighting deficiencies in the single-name CDS market.
The International Swaps and Derivatives Association, which represents participants in those markets, has pushed back and cited reforms since the 2008 financial crisis.
Villeroy also addressed other regulatory issues that have arisen since the collapse of three US lenders last month and the emergency takeover of Credit Suisse Group AG. He said:
- The failure of Silicon Valley Bank “argues for an effective and broader implementation” of the Basel III requirements for banks
- Technology allows depositors to pull funds more quickly and improvements in deposit insurance and/or adjustments to some bank liquidity ratios should not be “taboo” even if they aren’t “obvious”
- The European Commission’s recent proposals for making it easier to wind down smaller banks that fail is “a step in the right direction”
- Still, “increased mutualization” between the joint resolution fund and deposit guarantee systems “is questionable”
(Updates with Deutsche Bank CFO comments in fifth paragraph, further Villeroy remarks)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.